“Rails have become a lot more reliant upon commodities to fuel growth, much more so than in years past. Consequently, China does play a role,” said Mark Levin, a rail analyst with BB&T Capital Markets. “Commodity price moves are largely dictated by China’s consumption.”

Coal demand has fallen 9% for rails so far this year as more power plants switch to natural gas. Declining oil prices turned the boom in shipping crude-by-rail into a bust, with petroleum and related product shipments down 5% this year. And the railroads’ metal business is hurting, too, as natural-gas and oil producers need fewer pipes for drilling and imports become cheaper.

As a result, rail stocks are down an average of about 26% so far this year, according to BB&T Capital Markets, erasing last year’s 22% increase. Since the start of July, the stocks are down about 9%, BB&T Capital said.

Illustration:
David Vogin

The decline in rail volumes has hit profits, too. Norfolk Southern in July reported a 23% drop in second-quarter profit to $433 million, adding that declining revenue from coal, crude oil and fuel surcharges would pressure results for the second half of the year. Union Pacific’s profit dropped 7% to $1.2 billion in the same quarter.

While CSX reported that cost-cutting helped fuel a 4.5% rise in its quarterly profit, it issued a similar warning on coal.

Executives speaking at the Cowen conference are also likely to highlight efforts to scale back their networks to accommodate lower volumes and cost-cutting measures like furloughing employees and storing locomotives.

The rails are likely to provide a better “understanding of where they are getting the rail costs in line with the volume,” said David Vernon, an analyst with Sanford C. Bernstein & Co. “If the volume starts to moderate and finds the floor, they should be able to catch up with it.”

“
Rail pricing is still very strong, and even accelerating.
”

—Justin Long, Stephens analyst

Much of the problem stems from booms in cargo last year, when traffic volumes increased 4.5% across the board and railroads scrambled to add resources to accommodate the gains and to keep cargo moving. But as energy prices declined this year, volumes were hit, raising the question of whether pricing can hold up.

Railroads have been competing with trucking for intermodal volume, or the transportation of trailers and containers. That type of volume is up 2.6% so far this year, but as fuel prices fall, trucking has become more competitive with rails.

Still, rail “pricing is still very strong, and even accelerating,” said Justin Long, a Stephens Inc. analyst who met with the major railroads in recent days. “From a service perspective, too, things are getting better.”